Back into the Swing of Things

September 14, 2018

Greetings (and I hope all you Carolinians are doing OK!):

That darned Flo caused the cancellation of the South-East Association of Rail Shippers (SEARS) Fall Meeting this week – it looked to be a good one, including presentations by WestRock (the paper company at the forefront of the really cool & innovative rail/short-line data project I discussed post-ASLRRA Short Line Convention, and a likely topic at the Short Line CCO Panel at RailTrends in the late fall). I was also looking forward to hearing from Clarence Gooden, the retired President of CSX and railroad raconteur of longstanding; luckily I will hear him at NEARS (9/26-27). NSC was going to give a PTC update; they also bowed out of the conference in Laguna due to weather issues at home (and not because a conference in Laguna sounds so….’80s). On the end-of-the week note, I’ll cover a few topics – the pushback on my Wise Men of Rail, rail updates from the recent “CFO-paloozas” (AKA “Rail Equity Conferences”, recent management changes, intermodal update pre-(IANA)”EXPO”, rail traffic for August, a brief glimpse into railcar leasing, etc….

Next week I will relay takeaways from IANA’s Intermodal Expo and on AREMA (think: Capex!).

Rail traffic is solid vs easy, Harvey-comps: The AAR’s excellent RTI stated that US+Canadian volumes were up 4.5% - carloads up 4.3%, intermodal up 4.6%. For the latter that is a slight reduction. Going beyond the numbers is essential: US carloads were up 4%, but ex-coal they were up 8% (and export coal is being affected of course by Hurricane Flo at present). Overall, US coal in August was down 3% - US Ag was up 13%, grain +17% (so much for the early-year predictions, but maybe a last, pre-tariff surge? In Q2 soybeans carried was up 43%!). US IM was up 5%. The gains were pretty broad-based: 16/20 US commodities were up (even motor vehicles, +3%) while for Canada it was 14/20 (even lumber, up 9%). As Dan (“The Magician”) Keen points out in RTI, Harvey hit land on 8/26/17, and the gains chemicals & petroleum (almost 14%) reflect that….

More on “Railroader” and Hunter and investors and customers: First, I forgot two important bits on my “review” of the new bio of EHH. One was the admission that EHH and his financial backers thought the proposed merger of CP and an (pick one) eastern railroad wasn’t “really about extracting synergies from the combined railroads – it was about parachuting Harrison into one of them” to work his PSR magic. Well, of course. The other was the delicious anecdote about Hunter’s reaction to the fall 2017 STB Hearing on CSX service:

“’You know what you’ve had to do? (EHH) said, mimicking a complaint by customers who had to find alternatives to CSX – “Pay those exorbitant truck rates! Well, Kiss My Ass!!’”

How wise the “Wise Men”? – I got some great commentary on my informal, anti-scientific “Wise Men of Rail” survey; it’s notable that the most optimistic were the most senior. What does that mean? The wisest-of-the-wise? Or too far removed in both time and distance from the field? Almost all, however, noted the importance of changing the behavior of management and investors regarding the “Cult of the OR” and investment….

Leadership changes at CSX and KSU (KCS): Another CMO bites the dust, it seems, after UNP, when Brian Hancock was moved to Chief Innovation Officer and Mike Naatz, currently SVP and Chief InformationOfficer, will become CMO. However, KCS assures me that this is both part of the process of leadership development and a really great thing for both Brian and the company, which is staking out a claim to be an innovation/technology leader (as were Brian’s previous companies). So, rather than be concerned about Brian’s speech at RailTrends, I am now, if anything, even more excited about the opportunity. Meanwhile, CSX moved Dean Piacente, whom I long thought a star performer, from CSXIntermodal to Industrial Products (or car-load business, the heart of the PSR changes) and moved Maryclare Kenney up from automotive to VP-Intermodal & Automotive. CSXI has been going through a lot of streamlining changes of late (and I got a scare when one of the rail newswires wrote up the CSX/UP dustup and O/D changes last week – months after they were announced, and I thought it was “new-news”; hint: Which service was asleep? Hint: not the one I partner with….). I hope to meet Maryclare (great CSX name!) at IANA’s Expo starting Sunday in Long Beach….

Speaking of Intermodal….I will be doing a lot of that over the next few days at EXPO, a truly critical event on the calendar. IANA reports that volumes in intermodal across the modes was up some 7% YTD July, and a strong peak is occurring. This is helping the seemingly always plagued steamship industry (rates up 17% YTD – Drewry) to begin to achieve its holy grail, balance (HIS: 2018E volumes +5.3% will almost match capacity growth of +5.4%). US imported TEUs at +7% YTD; domestic containers at +6% on their historic trend line rather than as might have been expected, above it. Says Ted Prince, author of a recent much-discussed White Paper on Intermodal, as quoted in the JoC , “This may be the (intermodal) industry’s greatest opportunity for transformational growth in 40 years”. Can they rails carpe the diem?

Recent conferences confirm rail/shipper demand strength:

CN saw RTM (I prefer carload) growth of almost 9% in August with pricing in the strong +4% range, supported by investment (with returns “at a level that rewards fresh capital” said CEO JJ RUEST, on the important speakers at RailTrends this fall)

NSC sees their IM, conversely, up 9% QTD – though they continue to face the (historically unusual) question of “why aren’t you more like CSX?”. They hinted in Boston that the Q3 webcast would reveal more about their “productivity process” and their ongoing strategic planning review – with string hints that on that webcast or soon they might reveal plans (to reveal more) – ie; hope-against hope, maybe a coming Investor Conference (they are the only publicly-traded rail to not hold one over the past year, inclusive of CP’s October 3-4 in Calgary). They also said that, unlike CSX, they didn’t see a lot of line sales in their future, and that they were continuing to put aa lot of “resources towards service improvements” (hmmm)….

Rail-Cars & Leasing: a chat with a few leaders led me to increasing confidence that balance is coming, better days might be ahead – after all, now there is strong demand (see above and below) and poor rail service (albeit improving) adding to slower turn times – the car lessor’s best friend. So why isn’t it happening now? The continued market-busting (some say) actions of those OEMs also in the leasing business (and using leasing to support manufacturing, altering the market)? Or the overhang of the overbuild of the past few years? A conversation of FTR’s Dick Kloster (also an RT regular) yielded a few nuggets:

He raised his estimates: 2018 production numbers up from 50K to 55 – some of it being the usual suspects – plastics hoppers, etc – but also increased grain cars, “regular” tanks (a key theme: delayed replacement) and the next 2-4 years in the “low 60s”

Increased steel prices are a pass-through

The BNSF ban on non-new safety compliant tank cars for CBR service (although for now focused on “new business”) will be an interesting test – of market strength, compliance, etc

He does not expect box cars to get a life extension (from 50m to 65 years) putting that issue back on the front (ish) burner

Also of note:

Cho-Choo! Rail stocks have led the DJTA into, at almost +9% YTD, growing 2X the DJIA. That has some High Priests of Wall Street Voodoo all excited – more exciting is the order of the growth of the US Big 3 YTD: CSX +35%, NSC +23%, and UNP +17%. That sounds about right….

UPS held an Investor Conference this week that seems to have hit the expected points about transformation; analysts noted the “elevated levels” of capex to 2020 or so – up to almost – get this 10% (TEN per cent) of revenues) before falling back to the historic 7% range….

Back to the table – no, hold it, maybe not, with China (POTUS: “No pressure to make a deal” even as cabinet members offer more talks….).

Ford decided to stick to their recent decision to end production of the Focus Active, that had been planned for Mexico, then China, rather than take up POTIS’ suggestion to make the car in the US.

No word yet on MAFTA/NAFTA – Mexico ever more ready to (cravenly?) cut out Canada; Canada will balance political vs economic pressure (the Bank of International Settlements puts a one year “no-NAFTA” hit at 2.2 points of GDP).

Rails have captured about 18% of the cross-border NAFTA revenue – almost 2X their US percentage. Its an important mar

Recent coverage of energy, despite rising oil prices, suggests a cooling shale boom – at a recent conference the CEO of oil field services giant Schlumberger said recent data “suggests that Permian growth potential is lower than expected” though his chief rival, the Halliburton CEO, said that US shales was “still in early innings”. There has been concern about the importance of financing the shale growth (the NYT called it the possible source of the “Next Financial Crisis”!)